This week we continue our discussion of the Panic of 1907 and the man who, single-handedly, turned things around, J.P. Morgan.

As I wrote last week, speculation in the early 1900s was rampant. The lack of a central bank became a worrisome topic for many because the banks were intimately involved in the market, either as underwriters or investors. This included the trust banks, a group separate from commercial and investment banks. Trust banks were administrators of trust funds, money invested on behalf of estates, wills, and the like. They provided a tenuous link to the markets and many of them made loans to market speculators, taking securities as collateral. Thus, if stocks fell, the trust banks as well as other banks would be severely hurt, as would their investors. Without a central bank, no one would loan them money if a depositor's run developed or they needed cash to prop up their positions under duress.

The U.S. economy had taken a downturn in 1906. At Princeton University, the school's president, Woodrow Wilson, attributed the country's economic troubles to the government's "aggressive attitude toward the railroads, that made it impossible for them to borrow." President Teddy Roosevelt was under fire from the business community who urged him to ease up on regulatory measures and antitrust prosecutions. Instead, Roosevelt threatened at the end of 1906 to subject all large trusts to federal control. Americans were enjoying "a literally unprecedented prosperity," he said, ignoring the storm clouds on the horizon.

In her book "Morgan: American Financier," author Jean Strouse writes of this time and J.P.'s emerging role in the spring of 1907.

"Morgan planned to leave for Europe in mid-March 1907, but the combination of monetary shrinkage [largely due to financing of the Boer and Russo-Japanese Wars] and a rumor that Roosevelt would make some dramatic new move against the railroads called him out of his 'Up-Town Branch.' He went to Washington on March 12 and spent two hours discussing 'the present business situation' with the President. As he left the White House he told the press that Roosevelt would soon meet with the heads of leading railroads to see what might be done to 'allay public anxiety.'"

On March 12, the Dow Jones Industrial Average stood at 86.53. On March 13, the stock market began to fall and closed that day at 83.12. Morgan sailed for Europe. On March 14, the market crashed, losing 8.3% of its value (DJ 76.23). The next six months saw the market steadily erode.

Then on October 21, a run developed on The Knickerbocker Trust Co. of New York (this was before the signing of Latrell Sprewell). According to author John Steele Gordon, "Depositors lined up in front of the bank's headquarters on the future site of the Empire State Building to demand their funds. The bank closed the next day after an auditor found that its funds were depleted beyond hope. The bank's president, Charles Barney, shot himself several weeks later, prompting some of the bank's outstanding depositors to commit suicide as well."

After this fiasco, J.P. Morgan and his Wall Street cronies put together a rescue package designed to prop up the other trust institutions. The group got together with Teddy Roosevelt's Treasury Secretary, George Cortelyou, who provided them with $25 million to keep the system from collapsing. The funds were then deposited in the national banks in New York with the intent of adding funds to a system sorely in need of more liquidity. The banks were to apply the funds as they saw fit to prevent further panics.

[On October 21, the Dow closed at 60.81 it would bottom at 53.00 on November 15, a decline of 39% since March 12]

Roosevelt had tremendous faith in Morgan. But it was extraordinary that the Treasury of the largest emerging economy in the world had to transfer funds to private bankers in order to prevent a financial collapse. The rumor was rampant that the bankers had orchestrated most of the panic themselves in order to make speculative profits.

After the Knickerbocker failure came the Trust Co. of America. Morgan organized a $3 million pool to save it. The bailout worked and a measure of confidence was restored. The $25 million pool from Treasury was parceled out as needed and it kept the stock market from totally collapsing, though imagine the chagrin today if the Dow fell from 11400 to 7000 (39%).

But the stock exchange continued to be weighed under by all of the margin selling. [Today, margin debt is soaring, up 46% over last year's high levels.] On October 24, the NYSE President, "Pay Me" Ransom Thomas, pleaded with Morgan to provide $25 million in funds to back the exchange, fearing it would not be able to remain open that day if help was not forthcoming. Morgan and the bank presidents responded quickly, pledging the funds, and the NYSE was able to remain open. Gordon writes that "when the support package was announced, pandemonium broke out on the exchange. Morgan heard a thunder of noise at his office across the street. It was the members of the NYSE giving him an ovation."

Morgan was hailed as the savior of the banking system, the stock exchange, and even New York City at the time. [Morgan had engineered a bailout package for NYC also in October. The city was in the throes of a depression with the market slide and bank failures which forced the city's back to the financial wall. Morgan agreed to underwrite a successful $30 million bond issue].

Of course Morgan did not go unrewarded. Recall from our story of two weeks ago that Teddy Roosevelt, despite his antitrust proclivities, allowed Morgan to purchase the Tennessee Coal and Iron Company for about $45 million when the true value was closer to $700 million, thus expanding Morgan's steel empire.

From time to time over the coming months I will have more on the fascinating Morgan.

Sources: "The Great Game," by John Steele Gordon

"Wall Street: A History," by Charles Geisst

"Morgan: American Financier," by Jean Strouse

Brian Trumbore

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